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CFA Level 1 Exam

3959 Questions

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Question No. 1

In a research report, a securities analyst with Smith, Kleen & Beetchnutty claims that the newly issued
perpetual preferred stock of Ludicrous Telecom should be purchased because its current market price does not reflect its "intrinsic value." The analyst cites a higher valuation as evidenced by the results produced by theperpetuity valuation model. Assume the following information:


Market price of  Ludicrous Telecom preferred stock: $20.75
Quarterly preferred dividend: $0.80
Expected return on the market: 14.75% per year
Risk-free rate of return: 5.00% per year

Given this information, are the claims of the analyst justified? If not, at what price is the preferred stock of Ludicrous Telecom fairly valued?
Choose the correct option from the given list.
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